Kevin C. Coleman - Vice President-Investor Relations David A. Zapico - Chief Executive Officer William J. Burke - Chief Financial Officer & Executive Vice President.

Nigel Coe - Morgan Stanley & Co. LLC Robert McCarthy - Stifel, Nicolaus & Co., Inc. R. Scott Graham - BMO Capital Markets (United States) Allison A. Poliniak-Cusic - Wells Fargo Securities LLC Christopher Glynn - Oppenheimer & Co., Inc. (Broker) Matthew McConnell - RBC Capital Markets LLC Richard Eastman - Robert W. Baird & Co., Inc.

(Broker) Akshay Bhatia - Bank of America Merrill Lynch Bhupender Bohra - Jefferies LLC.

I would like to welcome everyone to the AMETEK Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Mr. Kevin Coleman, you may begin your conference..

Great. Good morning. Thank you everyone for joining us for our second quarter earnings conference call. With me this morning are Dave Zapico, Chief Executive Officer, and Will Burke, Executive Vice President and Chief Financial Officer. AMETEK's second quarter results were released earlier this morning.

These results are available electronically on market systems and on our website at the Investor Section of the ametek.com. This call is also webcasted. It can be accessed on our website and at streetevents.com. The call will be archived on both of those sites.

Before we get started, I will remind you that any statements made by AMETEK during the call that are not historical in nature are to be considered forward-looking statements. As such, these statements are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations.

A detailed discussion of the risks and uncertainties that may affect our future results is contained in AMETEK's filings with the Securities and Exchange Commission. AMETEK disclaims any intention or obligation to update, or revise any forward-looking statements.

I'll also refer you to the Investor Section of ametek.com for a reconciliation of any non-GAAP financial measures used during this call. We'll begin with some prepared remarks by Dave and Bill, and then we'll open it up for questions. I'll now turn the meeting over to Dave..

Best of the Best Award for their quality and breakthrough designs. For over 60 year, Red Dot has been one of the largest and most influential independent product competitions in the world. So, this is a great honor.

Specifically, Creaform's products were recognized for their unmatched accuracy and reliability of the 3D measurements in harsh and unstable production environments. The new Creaform products recognized were the HandyPROBE Next, the MetraSCAN 3D and the C-Track.

Within global end-market expansion, the Creaform team has done an outstanding job actively expanding and growing their strong market presence, and quality control, and reverse engineered into new markets such as non-destructive testing and healthcare.

Creaform has also expanded their aftermarket calibration and repair capabilities globally to help further improve their value to the customer, to also leveraging AMETEK's global footprint to expand their direct sales activities in the US, Brazil, and Southeast Asia.

I would like to congratulate the Creaform team for their tremendous efforts and outstanding success. They have created a truly dynamic business for the execution of our growth strategies. Now, let me take a moment to comment on current market conditions and their impact on our outlook for 2016.

We fully understand and acknowledge the headwinds we face in this environment, given our mix of end-market exposures. These headwinds, especially within the oil and gas, and metals market have been deeper and more sustained than we initially expected when we started the year.

Visibility has remained limited as customers are cautious and are aggressively managing their inventory levels and capital spending plans. As we look ahead to the balance of the year, we believe the business has stabilized.

We do not anticipate a modest second half improvement as we had expected, but rather believe demand in the second half to be largely consistent with the first half. As a result, we now forecast 2016 revenue to be down low single-digits on a percentage basis from 2015 with organic sales down mid-single digits.

We expect earnings for 2016 to be in the range of $2.28 to $2.32 per diluted share, down 9% to 11% from 2015's adjusted diluted earnings per share. Third quarter 2016 sales are expected to be down mid-single digits versus the third quarter of 2015. And we estimate our earnings to be $0.54 to $0.55 per diluted share.

In summary, we remain focused on executing our four growth strategies despite economic uncertainty in many of our markets. We'll continue to aggressively manage our business in the short-term, while assuring we continue to make appropriate investments in our businesses to properly position us for 2017 and beyond.

While we have short-term market headwinds, I am very bullish on the opportunity for AMETEK to drive meaningful earnings growth and shareholder returns moving forward. Our balance sheet remains strong. We generate significant cash flow that provides us with plenty of liquidity to operate the business and pursue our acquisition strategy.

Our businesses are highly differentiated with strong market positions and excellent profitability. We have right-sized the cost structure and we'll realize meaningful incremental margins as the current market headwinds subside. Bill Burke will now cover some of the financial details, and then we will be glad to take your question.

Bill?.

Thank you, Dave. As Dave noted, our businesses performed well in the quarter, meeting our earnings expectations and generating strong cash flows despite that difficult end-market conditions. I'll provide some of the financial highlights. In the quarter, selling, general and administrative expenses increased due to the recent acquisitions.

The effective tax rate for the quarter was 27.5% down slightly from last year's second quarter rate of 27.7%. For 2016, we expect our tax rate to be between 26% and 27% as a result of the success of our ongoing tax planning initiatives.

As we have said before, actual quarterly tax rates can differ dramatically either positively or negatively from this full year rate. On the balance sheet, working capital defined as receivables plus inventories less payables was 19.8% of sales in the second quarter, down from 20.8% in the first quarter.

Capital expenditures were $14 million in the quarter and full year 2016 capital expenditures are expected to be $70 million. Depreciation and amortization was $41 million for the quarter, and we expect full year depreciation and amortization to be $165 million.

Operating cash flow was very strong in the quarter at $189 million, up 16% over the last year's second quarter. Free cash flow was also strong at $175 million in the quarter, up 15% over last year's second quarter.

And as a percent of net income free cash flow was a 126% for the second quarter and we expect the full year free cash flow to be 125% of net income. Total debt was $2.14 billion at June 30, up approximately $200 million from the 2015 year-end.

Offsetting this debt is cash and cash equivalents of $456 million, resulting in a net debt to capital ratio at June 30 of 33.4%. At June 30, we had approximately $1 billion of cash and credit facilities to fund our growth initiatives.

We remain active on deploying our strong free cash flow with our highest priority for capital deployment being acquisitions. Subsequent to the end of the second quarter, we closed two acquisitions, HS Foils and Nu Instruments bringing our cumulative expenditures for acquisitions in 2016 to approximately $360 million.

During the second quarter, we repurchased 417,000 shares of stock for $19 million and as well in the first several days of July, we repurchased just under 1 million shares of stock for approximately $45 million. In summary, we had a solid second quarter.

We're well-positioned to support our growth initiatives with our strong balance sheet and cash flows.

Kevin?.

Okay, great. Thanks, Bill. Hey, Brandi, we are now happy to open it up for questions..

Your first question comes from the line of Nigel Coe with Morgan Stanley..

Thanks, good morning..

Good morning, Nigel..

Good morning. Yeah. So, I guess obviously tough end market conditions. But if I compare – the last time we had big end market declines back in 2009 to today, you held the line on margins much better then.

I'm just wondering maybe, David, if you could just maybe compare and contrast 2009 to here, what led you to keep margins pretty flat to slightly up during that period. And obviously we're seeing a bit more pressure today..

Right. That's a great question, Nigel. You'll recall, 2009 was much different than it is in the current environment. All of the markets were down and we took action to deal with all the markets then it returned very quickly. But in the current environment, a couple of our markets are down, but some of our markets are hanging in there fine.

So, the difference really is, it's a much slower market and the market has drug on for some time. And we have a much higher margin company right now. Remember that we were a mid-teens operating income margin company. Now we're much higher. And the two markets that are down, about 20% of our company, oil and gas and metals are down 30%.

So, that's a difficult tailwind to offset, but we've done a good job to do it. We still have 22.4% operating margins and we had a good operating quarter..

Okay. No, I understand that. And then, just maybe a related question, just thinking about your exports from the US. You've got a relatively high U.S.

export exposure and I'm wondering the impact of the stronger US dollar particularly on your Process business what impact that's having on pricing within Process and maybe on top of that, any hedge impacts on margins would be helpful..

Right. Yeah. The question of price, across our whole business, we were up about 1 point and we had total inflation of a little less than that. So, it was still a positive contribution. We are seeing additional headwinds as you talked about, so, we call that flat for the year, meaning price will offset inflation.

So, it's a different environment and our Process businesses, they were very successful in expanding in the emerging markets. Also, very successful in the oil and gas market. So, that is one point that we're seeing issues. Certainly, with a strong US dollar when we're manufacturing in the US, we see competitive pressure because of the strong dollar.

There is no doubt about that. We are dealing with that by relocating to low cost locations and in most situations, we don't have competitors in different market segments that give us an advantage. But in terms of the translation and transaction effects, now we are in a relatively stable environment.

We're not seeing much effect and you know we're naturally hedged in most of our markets. So, I hope those answers your questions..

Okay. Is the pricing flat? Or price cost plus the....

Yeah, pricing is up a point across the business. And price, less total inflation, that's all costs in the business, is still slightly positive for the quarter. But our outlook for the year is calling price, less total inflation to be flat..

Got it. Okay. Thank you..

Sure..

Your next question comes from the line of Robert McCarthy with Stifel..

Hi. Good morning, everyone.

How are you doing today?.

Good morning, Rob..

Okay. A couple of questions. One, I think I it was customary in the past that Frank would kind of go through the state of some of the sub-segments in terms of what we're seeing, in terms of growth and just a little bit of more color.

If you could do that kind of State of the Union for AMETEK, right now, that would be helpful?.

Sure, Rob. I'll start with EIG aerospace. EIG aerospace sales were flat as compared to the last year, as we saw continued strong growth across the commercial business that was offset by weakness in the business and regional jet market.

For all 2016, we expect a similar trend to continue as the second quarter, with the commercial market being strong and offsetting weaker business than regional jets. This business continues to deliver strong new programs wins. These wins are across a wide range of platforms, including commercial OEM, business and regional jets, military.

And year-to-date they have already won $230 million in life of program wins. So we're really excited about the new business we're winning in that market. And you know that's important for the future of any aerospace business. Next sub-segment where we process.

Organic sales in process were down mid-single digits in the quarter, driven largely by weakness across our oil and gas business. Our Ultra Precision Technology business performed very well in the quarter. That team has done an excellent job managing the business.

And for all of 2016, we expect organic sales for our Process business to be down to mid-to-high-single digits driven by the weakness in oil and gas.

Going to the EIG, Power & Industrial sub-segment, we have overall sales for our Power & Industrial businesses were up double digits driven by the contributions of recent acquisitions of ESP/SurgeX and Brookfield, organic sales were down mid-single digits in the quarter.

And for all of 2016, we expect organic sales for Power & Industrial to be down mid-single digits versus 2015, which Is unchanged from our prior forecast. So when you step back, in 2016 for all EIG, we expect overall sales to be down low-single digits, with organic sales down mid-single digits.

And if we switch to EMG, first the differentiated parts of our EMG business, organic sales were down mid-single digits, driven largely by continued weakness across our Engineered Materials, Interconnects and Packaging business. We did see sequential stabilization in this business.

However, the second half improvements that we had anticipated are going to be delayed and delayed out of 2016. As a result, we expect second half sales across our EMIP businesses to be largely flat with the first half. And for all of our differentiated EMG business we now expect organic sales to be down mid-single digits versus the prior year.

And finally, our Floorcare & Specialty Motors business. Although a small part of the AMETEK, organic sales on our Floorcare & Specialty Motors business were down low-teens in the second quarter as a result of softer demand across our key markets.

And for all of 2016 we expect this business to be down mid-single digits organically as comparisons ease to the back half of the year. So, if you look at only EMG, we expect the overall sales to be down low-single digits and organic sales to be down mid-single digits..

Great..

And all AMETEK....

Yeah..

... we expect overall sales to be down low-single digits and organic sales to be down mid-single digits on a percentage business. Hope that helps..

Yeah, it does. Thanks for that run through. I guess, the next question obviously is kind of cadence of M&A, size of M&A. I mean, obviously you have deployed a fair amount of capital here.

You are in an environment where – I hate to typify it – but you have eroding fundamentals of the margin yet, very high equity valuations which would imply high valuations for deals in both the public and private markets. So, the bid ask is really kind of nettlesome at this point.

I mean, do you think, this causes a challenge to transacting deals or deals of size? And how do you think about public deals because I think that was an area of potential opportunity for you?.

Right, you have a lot of questions there. I'll try to unpack them. I think, the first point is we have four deals done this year, and we deployed $360 million in free cash flow. And we're about half way through the year, so we're pretty much online for what we're doing. So, we agree that the environment is tough, but we're still getting it done.

The second point is, we're bullish on our pipeline. We talked about expanding our pipeline past a couple of quarters, and we're starting to benefit from the efforts of the pipeline identification efforts. And as you mentioned and recall, our sweet spot is that $50 million to $200 million deal.

But we've expanded our horizons now, we're looking for deals up to $500 million in revenue, and we're looking at both private and public companies and we're really optimistic, because our pipeline is starting to reflect the efforts of the last couple of quarters as those businesses are working their way through the pipeline.

So, in terms of the acquisitions, it is a tougher environment, we're getting deals done. We have a solid pipeline, we end up parsing those deals and selecting the deals to do that we can add the most value to and we're still very selective.

And it is a key driver of our future value enhancement, so I'm really optimistic, we have plenty of fire power, $1 billion of capacity within our existing credit lines and cash on hand.

More importantly, our operating cash flow is $750 million, free cash flow of about $670 million and I think this can be a significant driver for the balance of 2016 and 2017 performance..

Last question if you indulge me. In terms of the guidance for the full-year, you have visibility in kind of your end markets to the back half and some of the inventory challenges you've had in the stabilization.

But, suffice it to say, you feel good about this guidance, is it conservative, is it unlikely we'll get another cut in the back half?.

No. There is not going to be another cut in the back half. We feel the business has stabilized, key markets, headwinds have stabilized, and our second half looks very much like our first half..

I'll leave it there. Thank you..

Okay. Great..

Your next question comes from the line of Scott Graham with BMO Capital Markets..

Hey, good morning. And welcome to chair your first call, Dave..

Thank you, Scott..

Good morning, Bill, as well Kevin. Unfortunately, it comes under not terrific auspices, but I certainly did like the answer to, or how you finished Rob's question just now.

I guess maybe more surgically, I was wondering if you could tell us what were the pressure points on the second half effective guidance reduction here? What changed? You seem to have pretty good line of sight, you gave us some really good numbers in the first quarter as to why the guidance needed to come down.

Could you maybe do something similar to that for the second half to perhaps make us feel as good as you feel about the full-year guidance at this point?.

Yeah. So there is kind of two questions there. One, really what's driving the takedown and why do we feel good about the stabilization. So I'll take the first point. Really, if you look at it, it can be explained really easily economically. Our organic growth is dropping 2.5 points versus the prior forecast or approximately $100 million.

And it's really driven by oil and gas, and metals. That results in a 50% decremental. Oil and gas is one of our most profitable businesses. So if you take that $50 million and you look at the number of shares we have, it turns out to $0.16. So that puts you right in the mid-point of the guidance range. So that's what happens economically.

When we look out for the balance of the year, really our EMIP business we thought that was going to pick up and now it's not. And we can talk about that a little more in a bit, but fundamentally we got comfortable with it because it's flat. We saw the same demand patterns in Q1 as we saw Q2 and we're forecasting that for the rest of the year.

In terms of our oil and gas business, it dropped lower than we initially anticipated and we had modest improvements in that business and now we're forecasting it flat.

And when we look at that business, we really think it's bottomed, based on what our customers are telling us, based on some of the commentary that you have heard from Halliburton, Baker Hughes, Schlumberger where rig counts bottomed in Q2. So that business is down, but we think it's bottomed.

To your point, how do we get comfortable with the stability in the year, I'll talk a little about the first half being the second half, being similar, and really embedded within our guidance is really our Q4 is really a carbon copy of what we just did in Q2. So we're not really forecasting a major uptick in the second half.

In fact Q3 is down a bit seasonally because of some typical slowness that we've seen in Europe in the summer and we've normal seasonality in Q4, but really Q4 is very similar to Q2.

And to your broader point about the forecast and then how we're accurate, why we feel more confident, many of you've followed AMETEK for quite a while and in the past our forecasting process has yielded very consistent results and it hasn't the last few quarters.

And it's a difficult environment where we have visibility is weak from our customers and demand is weak in many of our markets, customers are delaying capital projects, customers are managing inventory aggressively, the emerging markets are challenged. But all that said, we have to do a better job forecasting our environment.

And I asked Bill, and the Group Presidents to take a look at our forecasting process with a focus on making it more robust given the environment.

So we took a different approach to forecasting, we got our entire executive office involved, we took a deep analytical review of each business to understand their forecast and to better assess potential risk. We had conversations with the financial community, so we understood what was happening.

And although it was a more time-consuming process, we felt it was the right thing to do at this point. It allowed our executive office, which has a broader field of view than those of our P&L leaders running our niche businesses, who by definition are only going to see a more narrower view of the global economy.

We took that broader view, we applied a consensus view of risk, it's reflected in our guidance and the final point, this is a rigorous process and I feel confident in the results..

Dave, that was very helpful. I very much appreciate that. But obviously the thing is, is that we – with the exception of the new rigor and the new sort of construct you have around the guidance, we did hear that in the first quarter, oil prices are now lower again, I know it's a small business but truck is falling apart.

And then you have Brexit potentially affecting Europe.

So if your reduction in guidance is only around oil and gas and metals, is there essentially a lift in the cost savings number to make sure you get there, that's kind of where I may be coming up short?.

Right. Yeah, our cost reductions are $130 million for the year. So, it's the same number that we communicated last quarter and really on lower volume, we're purchasing less material, but we're confirming the $130 million number. So, the cost reduction is embedded in it.

You mentioned Brexit, there is a situation where we are balanced in revenues and expenses. We have 5% of our sales in UK. We're balanced in revenues and expenses, so we have a natural hedge. So we're not going to have any transaction or translation surprise, so we have, expect a short-term impact to be minimal.

We've been checking with our UK businesses on a weekly basis. So we haven't seen any downturn in orders yet, mainly because we're in a market that's not maybe tied to the consumer there. And you're right, longer-term impact; it will be driven with the economic growth, on the European and the global growth.

And then, this uncertainty is going to go on for some time, but we're feeling pretty good about our exposure. And there are weak global macro conditions. I mean we highlighted oil and gas and metals, but certainly the global economy is not good, and you have the spillover effect from oil and gas into the other markets. So, all the markets are tough.

Again, with the first half or the second half they're essentially carbon copies of each other and we are very comfortable with it..

All right. That's great, Dave. Thanks very much..

Sure, Scott..

Your next question comes from the line of Allison Poliniak with Wells Fargo..

Hi, guys, good morning..

Hi, Allison..

Dave, I just want to go back, you said, to sort of that metals commentary, I guess, high-level.

I agree we would have thought that we would have seen improvement there, can you kind of walk us through what happened, what changed in that business that's driving sort of a lower expectation for the back half now?.

Right, sure. First, let me take a moment, in this business, we take metals, metals such as Titanium, Vanadium, Cobalt, Nickel, Molybdenum and process them with very unique processing capabilities into specialty alloys, powders, components and we are very – we have strong niche positions and we feel very good about this business.

What's happening is two things, visibility and inventory. In this business, we tend to be four to five levels removed from the ultimate end customer or application. So, as a result the visibility is limited and we can get misaligned with the broader end-market demand given the inventory buildup in the channel and we are seeing this play out right now.

To give you a tangible example, we produce specialized master alloys which is a critical component in that the making of titanium parts for aircraft, we're one of the few producers who can make the specialized alloy, but – we're far down removed on the food chain.

So, we sell to a titanium melter, who sells to an ingot maker, who sales to a part manufacturer, who sells to a sub-assembly manufacturer, who eventually gets on the airframe. So, we are quite a way removed in this business, different than most of our businesses. And we really, we identify some secondary inventory locations who have some inventory.

So although the long-term demand for titanium master alloy, in this case an aircraft, is very strong with new aircraft using more titanium, the short-term demand for alloys has been impacted by this excess inventory in the supply chain..

Is there any sense of when that excess inventory would be cleared?.

Yeah. It's not going to clear in 2016, but we're still bullish that it's going to clear and it will be in 2017..

Thank you. That's helpful.

And then on the new acquisition, you had talked about expanding it into the new market; can you expand on that, like where would that sort of a new market be for AMETEK?.

Yeah. Right. That's a great acquisition.

We're talking about Nu Instruments and they are very analytical high-end magnetic sector mass spectrometers and the markets that we're in currently are similar to the markets that our CAMECA business is in, the research market and environmental, I mean in the environmental sciences, material characterization, nuclear.

But the one new market that we're interested is, they have a new product that's in the food and beverage testing market.

And the interesting thing about it, in the news, there is a lot of questions about food contamination and the interesting thing about the new equipment is it is so sensitive, and has a unique processing capability, it can actually tell if there is a contamination, and it's sensitive enough to tell where in the world the food is from.

So we're very optimistic for the food testing market, and that business, if you take a step back, the business had basically one sales person. And they have great technology and we're going to plug it into our CAMECA business with a tremendous sales and service network and really optimistic about the potential for Nu..

That's great. Thanks so much..

Sure..

Your next question comes from the line of Christopher Glynn with Oppenheimer..

Thanks. Good morning..

Good morning, Chris..

Good morning, Dave. You referenced a bit of a 3Q step down clearly on the EPS.

Is that all volume related and what exactly drives the step back in 3Q versus the kind of run rates for the year?.

Right. Yeah. Its change from Q2 to Q3 can be explained by lower sales volume. So, our EPS is lower because of volume and typically we have a – Europe has some slower months and we have seasonality in Q3 that drops back a bit. And in Q4, there is really our normal seasonality.

And as I said before, Q4 is really a carbon copy of the quarter, we just completed. So, we feel pretty good about it..

Okay. It make sense. And then on the deals, I think you mentioned, a $150 million total sales acquired to-date, disclose Nu if I look at the first quarter deals. I think it all implies HS Foils is similar in size, do I have that right, to Nu..

Yeah. I think the numbers are wrong, it was a $115 million..

Oh, $115 million. Got it..

So, what you really have with Nu – we've paid a price that was a little more than two times sales, close to two times sales. And the, it's nine times the first year EBITDA and HS Foils is smaller. It's significantly smaller.

It's a technology acquisition, that's really going to help us drive organic growth and we're optimistic about it, but it's in the low millions of dollars in terms of the technology..

Okay. That clears it up. Thanks..

Yes. No problem..

Your next question comes from the line of Matt McConnell with RBC Capital Markets..

Thank you. Good morning, guys..

Good morning, Matt..

Just a follow up on the specialty metals business.

So, and I certainly understand that these end-markets are fundamentally pretty healthy, so is this a permanent change in how the supply chain is managing inventory, or are there any competitive shifts going on here that are notable? And just, any permanent change in the level of activity in the specialty metals business?.

No, it's not a permanent change, Matt. I mean, it's an issue where the metals market that I talked before, about the complex supply chain, it's kind of in between us and really good end-markets. And that market is in – it's into stress right now.

So the customers are managing their inventories for cash, they're being very aggressive in terms of working capital, but long term, we're very bullish.

I mean, if you look at the titanium used in aircraft, if you look at – that's all growing with the A315 and 787, if you look at the other end-market applications in medical and specialized industrial, we're very bullish.

I mean, certainly, we have a FX that's creating headwinds with that business along with some of our other business, but there really is no competitive dynamic that's major, and the market is going to return and we're going to have good businesses in good positions, and we just have to wait it out.

And we – I talk a lot about the visibility and the inventory, but that's the key factor. It is not an issue where it's not going to come back..

Okay. Thank you. And so, following up on some of the stabilization comments you made. You gave great insight around your level of conviction to that comment for oil and gas, some customer comments and actions, how about outside oil and gas? Any other – do you have orders or backlog or any other comments to give you confidence about stabilization ....

Yeah..

...

in the other parts of your business?.

Yeah, our backlog is $1.1 billion. I mean, if we look at the run rates and we spend a lot of detail on it, it gives us confidence for the back half of the year. So again, we mentioned that the metals business is already performing from – and that's flat sequentially from Q1 to Q3. There's not much change in the other parts of our business.

And there's not much change in the market. You really have a slow global macro environment and the two things we've been trying to get our hands around are really oil and gas, and metals, but the balance of the business is performing as we expected..

Okay, great. Thank you..

Sure..

Your next question comes from the line of Richard Eastman with Robert W. Baird..

Yes, good morning..

Good morning, Richard..

Dave, or maybe this is a question for Bill, but could you just explain the decremental EBIT in EIG? And roughly flat core sales, we delivered something like $9 million less of profit.

Is that all mix shift with oil and gas being weak?.

I think in EIG, we had a negative 6% core. So what you're seeing is roughly, I think it's a 50% kind of decremental margin in that business. You've got some of the higher margin businesses going down, and that's really what's driving the decline quarter-over-quarter in terms of the profitability in the business..

Another point I would add to that, Richard is, really as you think about what happened last year, our mid and downstream oil and gas businesses were still running very strong. So, you have that business as very profitable and now it has started down. So, that's a – one of the....

Okay..

...the profit impacts in Q2 year-over-year..

Okay.

And then I noticed from your comments, Dave, when you kind of laid out some of the sub segment expectations for sales, the cost driven motors business now is going to be down mid-single digits verus flat, but probably more to the point the EIG aerospace commentary suggests, the second half is flat and maybe the full year turns out to be flat versus – plus low single to plus mid-single.

So has there been a down shift on the aerospace side in that regional bizjet market?.

Yeah. The regional bizjet market, if you recall in 2015 we talked about some wins and new product wins and some retrofit opportunities and this year really in that regional business jet were down about 18% and you have some of the wins we talked about, I'll threw a couple of examples out with HondaJet. Well, we were design into the HondaJet.

We're making significant shipment commitments, but the HondaJet has been delayed. So there is – that market is down. We were over performing in 2015 when the market was flat and we're really at the market levels but dropping back. And I point to some programs that are not repeating or delayed..

I see..

The commercial market is strong and there is really no change in that. We have – there we have – if you look historically we're mainly a Boeing airframe company and over the past 10 years we've diversified our market to be even between Boeing and Airbus. So we're kind of don't care who wins, we win with both and we got more content on newer aircrafts.

So even though the airframes are relatively flat, we're so growing in commercial and we feel good about that right now..

Yeah. And then just one, maybe a strategic question for you, Dave.

As you kind of step in the role, and I know there is this kind of bullets flying all over the place here in terms of end-market conditions, but historically, AMETEK has targeted this framework where our core businesses and our core business prospects are kind of plus 5%, and then we're going to add 10% through M&A, but given where we are with the acquisitions over the last five years on the metals side, our oil and gas exposure was bigger than we had thought perhaps, but how do you feel about the next three years to five years, targeting a core growth rate for your current mix of businesses? I mean, should we think about that downshifting to more of a GDP number, and then we'll have fits and starts that maybe are plus or minus the GDP, is that a more realistic view, given the set of businesses, and the mix of business that you have kind of inherited and are now moving forward?.

Yeah. I see your point, it's difficult to predict what's going to happen in the first few years. And I did a lot of assessment of AMETEK's performance obviously, before I got into the role. And I'm a bit biased and look at our earnings growth through that – through the cycle of the last 10 years, we grew earnings 16% compounded annually.

And I'd give our self a good grade for that, an A. Margins, same kind of thing, highest margins in the industrial space, cash flow generation has been outstanding, our return on capital well in excess of our cost of capital. And our capital deployment spend has been excellent.

We're using our free cash flow to acquire good businesses and make them better.

But in my role, dealing with your question, organic growth is important and certainly over the next few years when the environment can be slower, we can deal with flatter markets, and taken the current aftermarket headwinds aside with oil and gas, and metals, but separate from that, when we return to more flattish, stabilized markets, we need to adapt our strategy to the potential new reality in the marketplace.

And really, when I look at it to ensure that we're going to be able to double our earnings over the next five years by low to mid-single digit organic growth and adding on acquisitions of 5% to 10% a year, we need to do a better job of organic growth.

And in our organic growth, we've been average, we've been average compared against some good companies, but we can definitely improve. So we can do this under the construct of our existing growth strategies and expand our operational excellence toolkit and put more tools in that toolkit to focus on our sales and marketing processes.

Really, making the front-end of our business as good as our operations. And that's going to be an area of focus for me and my team, and it's going to take some time, it's not going to be something that moves in the short term, but I'm confident they can get better. So we're focused on making organic growth better.

To your exact question, I think in a slow environment, we're going to have to boost it a little bit to get that low to mid-single digit organic growth that will allow us to double the earnings of the company..

Okay. All right. Well, thank you..

Sure, Richard..

Your next question comes from the line of Andrew Obin with Bank of America..

Hi, and this is Akshay Bhatia on for Andrew.

I just wanted to dig into your energy exposure a little bit, could you remind us what your exposure is between upstream, midstream and downstream after a couple of years of downturn, and maybe could you talk about some of the trends you saw over the course of the quarter, how April compared to June across these different business lines?.

Right, it was difficult to hear you, but I think I have your question. Yeah, the oil and gas business as we talked before was lower than forecasted in Q2, but stabilized. So we saw orders in that second quarter that really matched our Q3 volume level. So we feel good about that.

Coming into the year, it was about a $360 million business for AMETEK, about a third of that is upstream, a third of that is midstream and a third of that is downstream. The business is one-third in the US and two-thirds international. So we have a $120 million take down this year.

So the $360 million is going to be down $120 million, that's about a third, and it's about $60 million down in upstream, and $60 million down the combination of midstream and downstream. So if you look at our upstream exposure, that's down about 60%, and our midstream and downstream exposure is about 20%..

And I know you talked about pricing overall being up 1% but maybe could you discuss pricing that you're seeing specifically in the energy market?.

Yeah. The pricing in the energy market is below the average for the whole company. It's a very difficult environment. They've had to reduce costs to stay in business. We still can maintain pricing because we have very premier positions with niche-differentiated technologies.

But it's certainly not at the AMETEK level on average and it's down a bit in the energy market, more in the upstream than the midstream and downstream..

All right. Thank you..

Your next question comes from the line of Bhupender Bohra..

Hey, good morning, guys..

Good morning, Bhupender..

Hi. Just on the orders growth here.

Could you give us the number and organically what the orders growth were for EIG and EMG in the quarter?.

Sure. Organic orders were minus 7%, so that was in line with sales. And our EIG organic orders were down 5% and EMG organic orders were down 9%..

Okay. And we have been talking about products in the end-markets.

I think, I just wanted to focus on the geographic mix here, if you can give us some color how the emerging markets did actually in the quarter, because oil and gas is like two-third is international, just wanted to get a sense of how it did in like a Europe, Asia Pacific and outside the US, too?.

Yeah, sure, Bhupender. I'll go around the world. In the US, we were down high single-digits versus last year. There are broader industrial weakness, but the key factors driving the negative growth were oil and gas and metals. In Europe, it's been – it was down low-single-digit. So we've been at that level for several quarters.

Oil and gas impacted the region, but we don't have much metals exposure in Europe. And in Asia, we were down mid-single-digits and China was down mid-single-digits.

So, there is a little bit of an improvement in China, there was a better trend for Asia where we were down double-digits for three quarters in a row and now we are down mid-single-digits and China was a negative for us. So, orders for the region, the entire Asia region were a little bit better than prior years.

So, it seems to be that, that Asia is stabilizing, China is stabilizing and the one emerging market that I'd point out is doing better than the others is India, that's about the mid-single-digit growth, and it's a much smaller exposure but our investments there are paying off..

And how should we think about how these markets would act or what kind of assumptions you have for the second half? Like which of these markets would be kind of remaining stable along the lines you just mentioned or they would deteriorate further?.

Yeah. If I look at the trends in the US even though we're down high-single digits, it's slightly better from last quarter. Europe, that same trend is continuing and in Asia, we are improving a bit but really it's – we don't have anything factored in, it's really a down mid-single-digit. So, geographic-wise it's square with our concept of stabilization.

I mean fundamentally our business has stabilized and then – and we are working on our earnings growth for 2017 now. We're focused on our business. We are getting ready to go into our budgeting process and that budgeting process that we go through in Q3 and spreads into Q4, there is really no area immune from efficiency improvement.

We are going to look at things like global sourcing, low-cost region production, value analysis, value engineering, plant consolidations, engineering, all of the tools that we have and we are going to get a healthy cost reduction target. And we're going to pair that with acquisitions and that's how we are going to grow our earnings next year.

So the geography is not a big factor in thinking through what we have to do for the balance of the year or what we have to do next year..

Okay. And if I go back like a few quarters here when Frank was there, he did mention that AMETEK could actually grow their margins by 30 bps to 40 bps I believe, if I'm right even in a declining organic growth sales.

Now, how should we think about the back half of this year, are we – any assumptions here, where the focus will be more on the cost side as the macro is kind of....

Right, right. For the year, we're saying operating income margins will be down a 130 basis points to 170 basis points.

In the longer term – I mean given our high margin contribution margin businesses and given our operational excellence capabilities as far as the eye can see, when we get out of these market conditions and we return to internal growth we have the same 30 bps of margin expansion for the long-term..

Okay got it. And lastly, just wanted to tap into your oil and gas, you just gave a number of $360 million, is that company-wide, that's the direct exposure or ....

Yeah. That's direct exposure, it's not indirect exposure, saw some impact in other markets that are not oil and gas related but that's a direct exposure and that will be done about a $120 million this year..

Right, that's what, I just want to get a sense of – because when we think of AMETEK we think of oil and gas to be about like let's say 9% of total sale, which is about like $360 million which we just gave..

Right..

When we look at indirect exposure within EMRP and some other markets where oil and gas is definitely one of the markets where you're serving. I don't know if you've done some work internally to kind of give us a sense of what the indirect exposure would be..

No – yeah, the total market exposure for AMETEK, most of it's in process. But, the total market expansion for AMETEK, exposure – going into the year with $360 million, that's the entire exposure. I was talking about the indirect exposure. For example, when you look at the helicopter market, I mean they're using helicopters to fly to offshore platform.

So there's less demand for helicopters and that's in our business jet, regional jet segment. That's what we report it. So when I was talking indirect, I was talking about the total oil and gas exposure is the $360 million..

Okay. Got it. Thank you..

Sure..

There are no further questions at this time. I will now turn the call back over to Mr. Kevin Coleman. Please go ahead..

Okay, thank you, Brandi. Thanks everyone for joining the call today. As a reminder, a replay of the call can be accessed at ametek.com and streetevents.com. And as always, we're available for additional calls and questions this afternoon. Thank you..

This concludes today's conference call. You may now disconnect..